Baldick, Ross, Ashley Brown, Terry Winter, James Bushnell, and Susan Tierney. “A National Perspective on Allocating the Costs of New Transmission Investment: Practice and Principles.” In, 2007.Abstract

    The United States electric system has served the nation well with decades of reliable and universal electricity service. However, there is an increasing and broad recognition that significant amounts of investment in the transmission system will be needed in the near and long term if the system is to continue to provide the kind of electricity service that Americans desire and on which the nation’s economy depends.

    Attracting new investment in transmission in recent years has become more complicated than in the past because of the nation’s transition from a traditional era of utility regulation to a new era of national policy supporting “open access” to transmission. While the wholesale electricity market has changed fundamentally, the framework for enabling and encouraging investment that will better enable the grid to serve growing competitive markets has not yet fully emerged. One area still largely unresolved is how the costs incurred in transmission expansion will be allocated among users. While it is clear that many traditional cost-allocation approaches are no longer appropriate, new principles governing the allocation of cost responsibility for new transmission investment have yet to be fully articulated and implemented. It is the articulation of principles for that cost allocation that is the subject of this paper.

    This White Paper focuses on the principles for determining the benefits of new transmission investments, and for allocating the costs efficiently and equitably among those who benefit from the enhancement. While for the most part Federal regulators have been attempting in recent years to accommodate the differences of opinion on these topics by adopting transmission cost-allocation proposals resulting from settlement discussions or negotiated agreements among stakeholders in specific geographic areas, this approach suffers from the lack of common, predictable principles supporting transmission investment for the interconnected grid that serves broad regions of the nation. While the acceptance of different regional approaches is understandable from a pragmatic point of view because such settlement processes often allow issues to be resolved with less contentiousness, that approach is inadequate to the task of creating a sustainable and viable environment for continuing attraction of capital into transmission projects. Indeed, it is unlikely that the widely divergent methods proposed and accepted for allocating transmission costs can produce a body of policies that together both meet the legal standard of just and reasonable results and also prove to be the foundation for sustainable investment for the long term, particularly when these allocations interact across 2 regional boundaries. Finding a principled basis for cost allocation that relies on more than lowest common denominators would certainly provide a more appropriate and sustainable basis for public policy.

    Murphy, Frederic, and Yves Smeers. “On the Impact of Forward Markets on Investment in Oligopolistic Markets with Reference to Electricity. Part I: Deterministic Demand.” In, 2007.Abstract

    Murphy, Frederic and Yves Smeers. On the Impact of Forward Markets on Investment in Oligopolistic Markets with Reference to Electricity. Part I: Deterministic Demand. 15 June 2007, 38 pages.



    This paper analyzes the properties of three capacity games in an oligopolistic market with Cournot players and deterministic demand. In the first game, capacity and the operation of that capacity is determined simultaneously. This is the classic open-loop Cournot game. In the second game, capacity is decided in the first stage and the operation of that capacity is determined in the second stage. The first-stage decision of each player is contingent on the solution of the second-stage game. This is a two-stage, closed-loop game. We show that when the solution exists, it is the same as the solution in the first game. However, it does not always exist. The third game has three stages with a futures position taken between the capacity stage and the operations stage and is also a closed-loop game. As with the second game, the equilibrium is the same as the open-loop game when it exists. However, the conditions for existence are more restrictive with forward markets added. When both games have an equilibrium, the solution values are identical. The results are very different from games with no capacity stage as studied by Allaz and Vila (1993), where they concluded that forward markets can ameliorate market power.


    Murphy, Frederic, and Yves Smeers. “On the Impact of Forward Markets on Investments in Oligopolistic Markets with Reference to Electricity. Part II: Uncertain Demand.” In, 2007. Publisher's VersionAbstract

    Murphy, Frederic and Yves Smeers. On the Impact of Forward Markets on Investments in Oligopolistic Markets with Reference to Electricity. Part II: Uncertain Demand. 18 June 2007, 39 pages.



    There is a general agreement since Allaz-Vila’s seminal contribution that forward contracts mitigate market power on the spot market. This result is widely quoted and elaborated in studies of restructured power markets where it is generally believed that generators tend to exploit the special characteristics of this industry in order to extract higher prices. Allaz-Vila established their result under the assumption that the production capacities of the players are infinite. This assumption might have applied to the power industry in the early days of restructuring but it no longer holds in today environment of tightening capacity. We show that the Allaz-Vila result no longer holds when capacities are endogenous and constraining generation. Specifically the future market can enhance or mitigate market power when capacities are endogenous and demand is unknown at the time of investment. This result complements Part 1 where the authors show that forward markets do not mitigate market power when capacities are endogenous and demand is known at the time of investment. It also complements other work by Grimm and Zoettl who show that forward markets systematically enhance market power in some symmetric capacity-constrained markets.


    Zachmann, Georg, and Christian von Hirschhausen. “First Evidence of Asymmetric Cost Pass-through of EU Emissions Allowances: Examining Wholesale Electricity Prices in Germany.” In, 2007.Abstract

    Zachmann, Georg and Christian von Hirschhausen. First Evidence of Asymmetric Cost Pass-through of EU Emissions Allowances: Examining Wholesale Electricity Prices in Germany. March 2007. Paper, 8 pages.



    This paper applies the literature on asymmetric price transmission to the emerging commodity market for EU emissions allowances (EUA). We utilize an error correction model and an autoregressive distributed lag model to measure the relationship between CO2 price changes and the development of wholesale electricity prices. Using data from the German market for electricity and EUAs, we find that the rising prices of EUAs have a stronger impact on wholesale electricity prices than falling prices -- the first empirical evidence of asymmetric cost pass-through for these new allowances.


    Genc, Talat, Suvrajeet Sen, and Stanley Reynolds. “Dynamic Oligopolistic Games Under Uncertainty: A Stochastic Programming Approach.Journal of Economic Dynamics and Control 31, no. 1 (2007): 55-80. Publisher's VersionAbstract
    This paper studies several stochastic programming formulations of dynamic oligopolistic games under uncertainty. We argue that one of the models, namely games with probabilistic scenarios (GPS), provides an appropriate formulation. For such games, we show that symmetric players earn greater expected profits as demand volatility increases. This result suggests that even in an increasingly volatile market, players may have an incentive to participate in the market. The key to our approach is the so-called scenario formulation of stochastic programming. In addition to several modeling insights, we also discuss the application of GPS to the electricity market in Ontario, Canada. The examples presented in this paper illustrate that this approach can address dynamic games that are clearly out of reach for dynamic programming, a common approach in the literature on dynamic games.
    of Institute, University California Energy. “A New Design Tool for Visualizing the Energy Implications of California's Climates.” In, 2007. Publisher's VersionAbstract
    In California there are 16 different climate zones, as defined in the California Energy Code (Title24). The code requires slightly different types of buildings in each zone. These different building code requirements make it important for people who are designing, building, or maintaining these buildings to understand the unique attributes of their climate and how it will influence the design and performance of their buildings. In this UCEI project we developed a simple, free, easy-to-use, graphic-based computer program called Climate Consultant 3, and we have posted it on the State of California’s Flex Your Power web site and on the UCLA Energy Design Tools web site. Our objective is to make it freely accessible to architects, builders, contractors, and homeowners, etc., to help them understand their local climate and how it impacts their building’s energy consumption.
    Leuthold, Florian, and Christian Todem. “Flow-Based Coordinated Explicit Auctions: Auction Income Distribution.” In, 2007.Abstract
    The development of adequate marketbased congestion management methods in continental Europe lags similar developments elsewhere, e.g. in the US. To achieve greater integration of the single European market, the EU countries were grouped into seven regions, one of which is Central East Europe (CEE). Based on publicly available data, a flow-based coordinated auction for this region is modeled and simulated to demonstrate different auction income distribution schemes. The model is a linear optimization problem which is solved in GAMS. It is based on a zonal model of CEE including 8 zones and 13 tie-lines. We show that the auction income distribution schemes as defined by the European Transmission System Operators (ETSO) in 2001 do not provide proper incentives. Additionally, the most efficient auction income distribution scheme differs with the chosen market structure. Therefore, an allocation procedure that is based upon the estimated flows according to the bids accepted appears to be an appropriate trade-off for all of the cases included in our analyses.
    Faruqui, Ahmad, and Ryan Hledik. “The State of Demand Response in California.” In, 2007.Abstract
    By reducing system loads during critical‐peak times, demand response (DR) can help reduce the threat of brownouts and blackouts. DR is also widely regarded as having an important role in lowering power costs—and customer bills, by making organized wholesale power spot markets more competitive and efficient and less subject to the abuse of market power.  Consequently, there is common agreement among California’s energy policy makers, utilities, independent system operator and other interested parties that DR should be a key resource option.   The Brattle Group was engaged by the California Energy Commission—as part of the 2007 Integrated Energy Policy Report (IEPR) process—to gather inputs from a broad array of sources and to assess the accomplishments and shortcomings of DR activities in California. This assessment will explore the Energy Commission’s “load management” authority as a way to achieve higher levels of cost‐effective DR. The California Energy Action Plan II (EAP II) places DR at the top of the resource procurement loading order with energy efficiency (EE). It specifies that five percent of system peak demand be met by DR in 2007. However, despite significant past and continuing efforts by all of the parties, this goal is unlikely to be achieved.   How soon and whether the goal can be achieved are open questions. Despite California’s accomplishments in DR, the question remains: are new policy instruments necessary to expedite, extend and solidify the adoption of DR? This draft white paper is the first deliverable from this project. Its purpose is to define the current state of DR in California, laid out in this chapter, report key stakeholder observations and comments on DR policy, draw lessons learned from DR policy outside of California, both in the U.S. and internationally  and lay out ideas that could help move California forward.